Tag Archives: private equity fund

The SEC recently finalized the new investment adviser registration regulations and under those regulations private equity fund managers will be required to be registered with the SEC. However, Congress has recently been taking steps that may ultimately mean that private equity fund managers will escape registration requirements.

The Small Business Capital Access and Job Preservation Act (the “Bill”) proposed in March, would amend the Investment Advisers Act to provide an exemption from registration for some private equity fund managers. Recently the House Committee on Financial Services (“Committee”) amended and approved the Bill which will ultimately need to be passed by the full House and Senate before being presented to the President for signature. The amended text makes an exemption from registration available to advisers of private funds that have outstanding debt that is less than twice the amount investors have committed to the private funds (less than a 2-1 leverage ratio).

Proposed Requirements for Private Equity Fund Managers

The amended Bill would require the SEC to define “private equity fund” and to promulgate reporting and record-keeping requirements for those private equity fund managers who utilize the exemption. Specifically, the SEC would have to enact rules that require the managers “to maintain

such records and provide to the Commission such annual or other reports as the Commission taking into account fund size, governance, investment strategy, risk, and other factors, as the Commission determines necessary and appropriate in the public interest and for the protection of investors….” The SEC will be required to issue any regulations within 6 months of the date the Bill is signed into law.

This means that while PE fund managers would be exempt from registration, there would still be fairly significant compliance responsibilities. Essentially these managers would face a regulatory regime similar to exempt reporting advisers.

Support for the Bill

Supporters of the Bill essentially assert that because private equity funds neither caused nor contributed to the financial crisis, it would be unduly burdensome for these fund managers to register with the SEC. Specifically, supporters point to the costs associated with registration, the jobs created by the funds, and the general lack of systemic risk posed by the funds.

According to the Committee report, registration would be burdensome because:

“advisers to private equity funds will be required to calculate the value and performance of each of their funds on a monthly basis, which will in turn require advisers to private equity funds to calculate the value of each company in which the fund has invested on a monthly basis as well. Such valuations are time consuming and costly, and they divert much-needed capital and effort away from job creation and investment activities.”

The Committee received testimony stating:

“As of June 30, 2009, companies that received backing from private equity investment funds employed more than 6 million people. Studies show that the workforces of companies acquired by private equity firms increased by an average annual rate of 5.7 percent, compared to 1.1 percent for all U.S. companies. The Committee also received testimony about the costs of registering with the SEC, which some have estimated to be as high as $500 million industry-wide…”

The concerns were primarily that the burden imposed by the registration requirements could inhibit the creation of more jobs, with struggling or growing companies receiving less capital from such funds. The amended Bill would provide relief from registration for advisers to private equity funds that are levered by less than a 2-1 ratio.

Final Thoughts

Private equity fund managers should not stop beginning preparations to register as investment advisers with the SEC.

The Bill is a long way from being enacted into law – it still must be passed by the full House, the full Senate, and signed by the President. It will then take (at least) another 6 months for the SEC to issue final rules regarding record-keeping and reporting and to clarify the definition of “private equity fund.” Even with the Dodd-Frank registration deadline pushed back to March 30, 2012, waiting until the Bill and its accompanying rules and regulations are finalized would leave managers of these funds with little time to register in the event they ultimately do not fall within the exemption in its final form.

Cole-Frieman & Mallon LLP is a law firm which provides adviser registration, compliance and legal support to SEC registered fund managers. Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.

Today the House Financial Services Committee voted to require hedge fund managers to register with the Securities and Exchange Commission. While private equity firms are also required to register under the proposed bill, managers to venture capital funds are excluded from this registration requirement.

The bill will next be presented to the House of Representatives and if it passes there it will move onto the Senate and eventually to President Obama to sign into law. The name of the bill is the Private Fund Investment Advisers Registration Act of 2009. For the full text please see H.R. 3818.

Washington, DC – Today, the House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act, introduced by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The Committee passed H.R. 3818 with extensive bipartisan support by a vote of 67-1. Tomorrow, the Committee is expected to vote on Chairman Kanjorski’s H.R. 3817, the Investor Protection Act and H.R. 3890, the Accountability and Transparency in Rating Agencies Act.

“The Private Fund Investment Advisers Registration Act, which passed today with wide-ranging bipartisanship support, will force many more financial providers to register with the Securities and Exchange Commission,” said Chairman Kanjorski. “The past year has shown that the deregulation or in many cases, lack of regulation, of financial firms is an idea of the past. Advisors to financial firms must receive government oversight and we must understand the assets of financial firms, including for hedge funds, private equity firms, and other private pools of capital. Under this legislation, private investment funds would become subject to more scrutiny by the SEC and take more responsibility for their actions. I look forward to moving this legislation to the House floor for a vote.”

A summary of H.R. 3818 follows:

Everyone Registers. Sunlight is the best disinfectant. By mandating the registration of private advisers to private pools of capital regulators will better understand exactly how those entities operate and whether their actions pose a threat to the financial system as a whole.

Better Regulatory Information. New recordkeeping and disclosure requirements for private advisers will give regulators the information needed to evaluate both individual firms and entire market segments that have until this time largely escaped any meaningful regulation, without posing undue burdens on those industries.

Level the Playing Field. The advisers to hedge funds, private equity firms, single-family offices, and other private pools of capital will have to obey some basic ground rules in order to continue to play in our capital markets. Regulators will have authority to examine the records of these previously secretive investment advisers.

Below is the final text of the hedge fund registration bill as passed by the House Financial Services Commission.

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111th CONGRESS

1st Session

H. R. 3818

To amend the Investment Advisers Act of 1940 to require advisers of certain unregistered investment companies to register with and provide information to the Securities and Exchange Commission, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

October 15, 2009

Mr. KANJORSKI introduced the following bill; which was referred to the Committee on Financial Services

A BILL

To amend the Investment Advisers Act of 1940 to require advisers of certain unregistered investment companies to register with and provide information to the Securities and Exchange Commission, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Private Fund Investment Advisers Registration Act of 2009′.

SEC. 2. DEFINITIONS.

Section 202(a) of the Investment Advisers Act of 1934 (15 U.S.C. 80b-2(a)) is amended by adding at the end the following new paragraphs:

`(A) would be an investment company under section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) but for the exception provided from that definition by either section 3(c)(1) or section 3(c)(7) of such Act; and

`(B) either–

`(i) is organized or otherwise created under the laws of the United States or of a State; or

`(ii) has 10 percent or more of its outstanding securities by value owned by United States persons.

`(ii) assets under management attributable to clients in the United States of less than $25,000,000, or such higher amount as the Commission may, by rule, deem appropriate in the public interest or for the protection of investors; and

`(C) neither holds itself out generally to the public in the United States as an investment adviser, nor acts as an investment adviser to any investment company registered under the Investment Company Act of 1940, or a company which has elected to be a business development company pursuant to section 54 of the Investment Company Act of 1940 (15 U.S.C. 80a-53) and has not withdrawn such election.’.

(1) by redesignating subsections (b) and (c) as subsections (c) and (d), respectively; and

(2) by inserting after subsection (a) the following new subsection:

`(b) Records and Reports of Private Funds-

`(1) IN GENERAL- The Commission is authorized to require any investment adviser registered under this Act to maintain such records of and file with the Commission such reports regarding private funds advised by the investment adviser as are necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk as the Commission determines in consultation with the Board of Governors of the Federal Reserve System. The Commission is authorized to provide or make available to the Board of Governors of the Federal Reserve System, and to any other entity that the Commission identifies as having systemic risk responsibility, those reports or records or the information contained therein. The records and reports of any private fund, to which any such investment adviser provides investment advice, maintained or filed by an investment adviser registered under this Act, shall be deemed to be the records and reports of the investment adviser.

`(2) REQUIRED INFORMATION- The records and reports required to be maintained or filed with the Commission under this subsection shall include, for each private fund advised by the investment adviser–

`(A) the amount of assets under management;

`(B) the use of leverage (including off-balance sheet leverage);

`(C) counterparty credit risk exposures;

`(D) trading and investment positions;

`(E) trading practices; and

`(F) such other information as the Commission, in consultation with the Board of Governors of the Federal Reserve System, determines necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.

`(3) OPTIONAL INFORMATION- The Commission may require the reporting of such additional information from private fund advisers as the Commission determines necessary. In making such determination, the Commission may set different reporting requirements for different classes of private fund advisers, based on the particular types or sizes of private funds advised by such advisers.

`(4) MAINTENANCE OF RECORDS- An investment adviser registered under this Act is required to maintain and keep such records of private funds advised by the investment adviser for such period or periods as the Commission, by rule or regulation, may prescribe as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.

`(5) EXAMINATION OF RECORDS-

`(A) PERIODIC AND SPECIAL EXAMINATIONS- All records of a private fund maintained by an investment adviser registered under this Act shall be subject at any time and from time to time to such periodic, special, and other examinations by the Commission, or any member or representative thereof, as the Commission may prescribe.

`(B) AVAILABILITY OF RECORDS- An investment adviser registered under this Act shall make available to the Commission or its representatives any copies or extracts from such records as may be prepared without undue effort, expense, or delay as the Commission or its representatives may reasonably request.

`(6) INFORMATION SHARING- The Commission shall make available to the Board of Governors of the Federal Reserve System, and to any other entity that the Commission identifies as having systemic risk responsibility, copies of all reports, documents, records, and information filed with or provided to the Commission by an investment adviser under this subsection as the Board, or such other entity, may consider necessary for the purpose of assessing the systemic risk of a private fund. All such reports, documents, records, and information obtained by the Board, or such other entity, from the Commission under this subsection shall be kept confidential.

`(7) DISCLOSURES OF CERTAIN PRIVATE FUND INFORMATION- An investment adviser registered under this Act shall provide such reports, records, and other documents to investors, prospective investors, counterparties, and creditors, of any private fund advised by the investment adviser as the Commission, by rule or regulation, may prescribe as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.

`(8) CONFIDENTIALITY OF REPORTS- Notwithstanding any other provision of law, the Commission shall not be compelled to disclose any report or information contained therein required to be filed with the Commission under this subsection. Nothing in this paragraph shall authorize the Commission to withhold information from the Congress or prevent the Commission from complying with a request for information from any other Federal department or agency or any self-regulatory organization requesting the report or information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section.’.

Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3) is amended by adding at the end the following new subsection:

`(l) Exemption of and Reporting by Venture Capital Fund Advisers- The Commission shall identify and define the term `venture capital fund’ and shall provide an adviser to such a fund an exemption from the registration requirements under this section. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.’.

`(a) The Commission shall have authority from time to time to make, issue, amend, and rescind such rules and regulations and such orders as are necessary or appropriate to the exercise of the functions and powers conferred upon the Commission elsewhere in this title, including rules and regulations defining technical, trade, and other terms used in this title. For the purposes of its rules and regulations, the Commission may–

`(1) classify persons and matters within its jurisdiction based upon, but not limited to–

`(A) size;

`(B) scope;

`(C) business model;

`(D) compensation scheme; or

`(E) potential to create or increase systemic risk;

`(2) prescribe different requirements for different classes of persons or matters; and

`(3) ascribe different meanings to terms (including the term `client’) used in different sections of this title as the Commission determines necessary to effect the purposes of this title.’; and

(2) by adding at the end the following new subsection:

`(e) The Commission and the Commodity Futures Trading Commission shall, after consultation with the Board of Governors of the Federal Reserve System, within 6 months after the date of enactment of the Private Fund Investment Advisers Registration Act of 2009, jointly promulgate rules to establish the form and content of the reports required to be filed with the Commission under sections 203(i) and 204(b) and with the Commodity Futures Trading Commission by investment advisers that are registered both under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) and the Commodity Exchange Act (7 U.S.C. 1 et seq.).’.

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs hedge fund law blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. Cole-Frieman & Mallon LLP helps hedge fund managers to register as investment advisors with the SEC or the state securities divisions. If you are a hedge fund manager who is looking to start a hedge fund or register as an investment advisor, please contact us or call Mr. Mallon directly at 415-868-5345.

While hedge funds have reluctantly resigned to the likely fate of SEC registration (see MFA Supports Registration), the venture capital community has been fighting hard to remain unregistered. On this front, the VC community enjoyed a victory last week as Congressman Paul E. Kanjorski (D-PA) proposed an amendment to the Obama administration’s Private Fund Investment Advisers Registration Act of 2009 (“PFIARA”). The new proposed bill provides an exemption from registration for certain managers to “venture capital funds” as that term will be defined by the SEC. The following section provides the full wording of the new exemption and I end this posts with some of my thoughts on this exemption.

Venture Capital Fund Registration Exemption

The following section has replaced the previous section 6 (which now becomes section 7). Besides this change the PFIARA remains the same.

SEC. 6. EXEMPTION OF AND REPORTING BY VENTURE CAPITAL FUND ADVISERS.

Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3) is amended by adding at the end the following new subsection:

‘‘(l) EXEMPTION OF AND REPORTING BY VENTURE CAPITAL FUND ADVISERS.—The Commission shall identify and define the term ‘venture capital fund’ and shall provide an adviser to such a fund an exemption from the registration requirements under this section. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.’’.

Discussion of the Exemption

From a political perspective, I am actually pretty surprised that this was added to the bill. First, I find it interesting that a bill named the “Private Fund” registration act (not “Hedge Fund” registration act) would then exempt certain private funds. Second, it is curious that the drafter left it to the SEC to create a definition of “venture capital fund” – it will be interesting to see how the SEC interprets this Congressional mandate. Finally, it is also curious that VC funds are specifically exempted and potentially not private equity funds. Generally VC funds are regarded as a type of private equity fund – presumably the SEC could fix this by creating a very broad definition for “venture capital funds” which would also include private equity. Unfortunately this puts the SEC in a difficult position as they will now have to deal with the politics of creating definitions.

We will keep you up to date on this and other bills. Please also remember that this current version of the bill is subject to future change.

WASHINGTON – Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today released discussion drafts of three pieces of legislation aimed at tackling key parts of reforming the regulatory structure of the U.S. financial services industry. The draft bills include the Investor Protection Act, the Private Fund Investment Advisers Registration Act, and the Federal Insurance Office Act.

Chairman Kanjorski introduced bipartisan legislation earlier this year and in the last Congress to create a federal insurance office, which was backed by the Obama Administration and included in its proposals for financial services regulatory reform. Congresswoman Judy Biggert (R-IL), Ranking Member of the House Financial Services Subcommittee on Oversight and Investigations, joined as an original co-sponsor of the 2009 bill when it was first introduced. Chairman Kanjorski also worked to revise and significantly enhance the Investor Protection Act and the Private Fund Investment Advisers Registration Act proposed by the Obama Administration this summer.

“Today, we take another step forward in overhauling the regulatory structure of the financial services industry,” said Chairman Kanjorski. “With these three bills we will address many of the shortcomings and loopholes laid bare by the current financial crisis. The Investor Protection Act will better protect investors and increase the funding and enforcement powers of the U.S. Securities and Exchange Commission. We must ensure that investor confidence continues to increase for the betterment of our financial system.

“Additionally, we need to ensure that everyone who swims in our capital markets has an annual pool pass. The Private Fund Investment Advisers Registration Act will force many more financial providers to register with the SEC. Many financial firms skirt government oversight and get away like bandits, but now the advisers to hedge funds, private equity firms, and other private pools of capital would become subject to more scrutiny by the SEC.

“Finally, bipartisan legislation which I first introduced in the last Congress to create a federal insurance office to fill a gap in the federal government’s knowledge base on financial activities. For several years, including in this Congress, I have worked to advance bipartisan legislation to address this issue, and I am pleased that the Administration also understands the need for this office and welcome the refinements they suggested to my bill.”

Summaries of the three legislative discussion drafts follow:

…

Private Fund Investment Advisers Registration Act

Everyone Registers. Sunlight is the best disinfectant. By mandating the registration of private advisers to hedge funds and other private pools of capital, regulators will better understand exactly how those entities operate and whether their actions pose a threat to the financial system as a whole.

Better Regulatory Information. New recordkeeping and disclosure requirements for private advisers will give regulators the information needed to evaluate both individual firms and entire market segments that have until this time largely escaped any meaningful regulation, without posing undue burdens on those industries.

Level the Playing Field. The advisers to hedge funds, private equity firms, single-family offices, and other private pools of capital will have to obey some basic ground rules in order to continue to play in our capital markets. Regulators will have authority to examine the records of these previously secretive investment advisers.

The following statement is attributed to Mark G. Heesen, president of the National Venture Capital Association:

“The National Venture Capital Association (NVCA) applauds the Private Fund Investment Advisers Registration Act proposal announced today by Representative Paul Kanjorski (DPA), Chairman of the House Financial Services Capital Markets Subcommittee. We are extremely appreciative of the work done in drafting this legislation by the Subcommittee and Members of the full Committee under the leadership of Chairman Barney Frank (DMA). This proposal recognizes that venture capital firms do not pose systemic financial risk and that requiring them to register under the Advisers Act would place an undue burden on the venture industry and the entrepreneurial community. The venture capital industry supports a level of transparency which gives policy makers ongoing comfort in assessing risk. The NVCA is committed to working with Congress, the SEC and the Administration on the most effective implementation of this proposal.

We look forward to sharing specific thoughts with Members of the Committee on Tuesday, October 6 when NVCA Chairman Terry McGuire is scheduled to testify at the hearing, “Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance Office.” The National Venture Capital Association (NVCA) represents more than 400 venture capital firms in the United States. NVCA’s mission is to foster greater understanding of the importance of venture capital to the U.S. economy and support entrepreneurial activity and innovation. According to a 2009 Global Insight study, venture-backed companies accounted for 12.1 million jobs and $2.9 trillion in revenue in the United States in 2006.

The NVCA represents the public policy interests of the venture capital community, strives to maintain high professional standards, provides reliable industry data, sponsors professional development, and facilitates interaction among its members. For more information about the NVCA, please visit www.nvca.org.

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs hedge fund law blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. Cole-Frieman & Mallon LLP helps hedge fund managers to register as investment advisors with the SEC or the state securities divisions. If you are a hedge fund manager who is looking to start a hedge fund or register as an investment advisor, please contact us or call Mr. Mallon directly at 415-296-8510. Other related hedge fund law articles include:

After much discussion in the press over the last 8 to 10 months abut the possibility for hedge fund registration, the Treasury today announced the Obama Administration’s bill which requires managers to “private funds” to register with the SEC. This registration requirement would apply to managers of all funds relying on the Section 3(c)(1) or Section 3(c)(7) which includes managers to private equity and venture capital funds. Additionally, all registered managers would need to provide the SEC with certain reports on the funds which they manage.

Continuing its push to establish new rules of the road and make the financial system more fair across the board, the Administration today delivered proposed legislation to Capitol Hill to require all advisers to hedge funds and other private pools of capital, including private equity and venture capital funds, to register with the Securities and Exchange Commission (SEC). In recent years, the United States has seen explosive growth in a variety of privately-owned investment funds, including hedge funds, private equity funds, and venture capital funds. At various points in the financial crisis, de-leveraging by such funds contributed to the strain on financial markets. Because these funds were not required to register with regulators, the government lacked the reliable, comprehensive data necessary to monitor funds’ activity and assess potential risks in the market. The Administration’s legislation would help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to our overall financial stability.

Protect Investors From Fraud And Abuse

Require Advisers To Private Investment Funds to Register With The SEC. Although some advisers to hedge funds and other private investment funds are required to register with the Commodity Futures Trading Commission (CFTC), and some register voluntarily with the SEC, current law generally does not require private fund advisers to register with any federal financial regulator. The Administration’s legislation would, for the first time, require that all investment advisers with more than $30 million of assets under management to register with the SEC. Once registered with the SEC, investment advisers to private funds will be subject to important requirements such as:

Substantial regulatory reporting requirements with respect to the assets, leverage, and off-balance sheet exposure of their advised private funds

Disclosure requirements to investors, creditors, and counterparties of their advised private funds

Require Increased Disclosure Requirements. The Administration’s legislation would require that all investment funds advised by an SEC-registered investment adviser be subject to recordkeeping requirements; requirements with respect to disclosures to investors, creditors, and counterparties; and regulatory reporting requirements.

Protect Financial System From Systemic Risk

Monitor Hedge Funds For Potential Systemic Risk. Under the Administration’s legislation, the regulatory requirements mentioned above would include confidential reporting of amount of assets under management, borrowings, off-balance sheet exposures, counterparty credit risk exposures, trading and investment positions, and other important information relevant to determining potential systemic risk and potential threats to our overall financial stability. The legislation would require the SEC to conduct regular examinations of such funds to monitor compliance with these requirements and assess potential risk. In addition, the SEC would share the disclosure reports received from funds with the Federal Reserve and the Financial Services Oversight Council. This information would help determine whether systemic risk is building up among hedge funds and other private pools of capital, and could be used if any of the funds or fund families are so large, highly leveraged, and interconnected that they pose a threat to our overall financial stability and should therefore be supervised and regulated as Tier 1 Financial Holding Companies.

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Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. Mallon P.C. helps hedge fund managers to register as investment advisors with the SEC or the state securities divisions. If you are a hedge fund manager who is looking to start a hedge fund or register as an investment advisor, please contact us or call Mr. Mallon directly at 415-296-8510. Other related hedge fund law articles include:

The first quarter of 2009 marked the lowest level of investment since 1997, according to the National Venture Capital Associates. The Venture industry in particular has suffered as the number of IPOs and acquisitions has plummeted. In the Silicon Valley, where some of the recessionary fog is now lifting, investors and entrepreneurs have a chance to invest in the market and take advantage of the low valuations. With technology and software tools driving down the cost of starting a tech company by more than 100 times compared with a few decades ago, the potential for a new era of technology investment is emerging. Marc Andreessen, recognized by the venture capital community as an entrepreneurial visionary, has announced the formation of a new fund attempting to take advantage of this new trend.

Marc Andreesen – Industry Icon

Andreessen’s fund, Andreessen Horowitz, is co-founded with Ben Horowitz, an affiliate and partner from their former venture – Netscape. Andreessen moved to Silicon Valley and co-founded Netscape with entrepreneur Jim Clark, funded by blue-chip venture fund Kleiner Perkins. Almost instantly Netscape exploded into a business with enormous profit potential, with this 1995 IPO stock offered at $28 grew up to $75 by the close of trading. However, the glory of Netscape was short-lived, as Microsoft surfaced into the same competitive space and won the battle. Soon thereafter, the investment industry experienced the now-famous dot-com bust, which all but froze the technology industry. Andreessen continued to build his reputation in the Silicon Valley as a well-connected entrepreneur who served as an invaluable vessel of knowledge to other entrepreneurs (i.e. Mark Zuckerberg, CEO of Facebook) in terms of how to build and manage a strong technology company. Now, Andreessen has joined forces with his former colleague, Horowitz, to introduce a new fund that will focus its investment strategies on a diversified portfolio of emerging startups in technology sector.

The New Fund – Strategies and Setbacks

One reason the new fund has the industry buzzing is the sheer amount of financial backing it brings in a time where investor confidence is low. Through a few institutional investors and several key industry players, Andreessen Horowitz was able to pull in approximately $300 million in funds, which amounts to less than one third the size of the biggest boom-year venture funds and qualified Andreessen Horowitz to be regarded as the most prominent fund raised in 2009.

The Andreessen Horowitz investment strategy includes investing in 60-70 startups and having deal days meeting with at least 5-10 companies per day, offering the partners a constant vantage point to target and isolate industry shifts and evaluate what new innovations may be profitable. The fund’s strategy of investing in a myriad of startups does pose potential problems, such as truly tracking and backing the potential downfall of one or several of these many companies, and monitoring potential conflicts where the fund invests in two startup companies that eventually become direct competitors of one another (e.g. Facebook and Twitter). In response to how he plans to guard against such potential setbacks, Andreessen says that he will extensively research and disclose all potential conflicts and take measures to protect confidential information.

What this Means for the Investment Industry

As Andreessen attempts to restore investor confidence by capitalizing on the new rapid emergence of startup technology companies, the hope of generating large, ‘Netscape-esque’ returns sets a new optimistic tone for an otherwise risk-averse financial community. If successful, the new fund could potentially lift the cloud of doubt that looms over the investment industry by employing a strategy that both embraces cutting-edge innovation and provides even the smallest industry players the opportunity to have their ideas seen and heard by renowned industry veterans.

Question: What is a private equity fund? What is the difference between a private equity fund and a hedge fund?

Answer: For many people who are not familiar with the alternative investment industry, hedge funds and private equity funds look like the same thing. The distinction is not necessarily in the legal structure (which is similar), but in the investment style. The GAO’s hedge fund and pension report, which I discussed recently, provided a great definition for private equity funds:

Like hedge funds, there is no legal or commonly accepted definition of private equity funds, but the term generally includes privately managed pools of capital that invest in companies, many of which are not listed on a stock exchange. Although there are some similarities in the structure of hedge funds and private equity funds, the investment strategies employed are different. Unlike many hedge funds, private equity funds typically make longer-term investments in private companies and seek to obtain financial returns not through particular trading strategies and techniques, but through long-term appreciation based on corporate stewardship, improved operating processes and financial restructuring of those companies, which may involve a merger or acquisition of companies. Private equity is generally considered to involve a substantially higher degree of risk than traditional investments, such as stocks and bonds, for a higher return.

While strategies of private equity funds vary, most funds target either venture capital or buy-out opportunities. Venture capital funds invest in young companies often developing a new product or technology. Private equity fund managers may provide expertise to a fledgling company to help it advance toward a position suitable for an initial public offering. Buyout funds generally invest in larger established companies in order to add value, in part, by increasing efficiencies and, in some cases, consolidating resources by merging complementary businesses or technologies. For both venture capital and buy-out strategies, investors hope to profit when the company is eventually sold, either when offered to the public or when sold to another investor or company. Each private equity fund generally focuses on only one type of investment opportunity, usually specializing in either venture capital or buyout and often
specializing further in terms of industry or geographical area. (Other less common types of private equity include mezzanine financing, in which investors provide a final round of financing to help carry the company through its initial public offering, and distressed debt investments, in which firms buy companies that have filed for bankruptcy or may do so and then typically liquidate the company.)

Investment in private equity has grown considerably over recent decades. According to a venture capital industry organization, the amount of capital raised by private equity funds grew from just over $2 billion in 1980 to about $207 billion in 2007; while the number of private equity funds grew from 56 to 432 funds over the same time period.

As with hedge funds, private equity funds operate as privately managed investment pools and have generally not been subject to Securities and Exchange Commission (SEC) examinations. Pension plans typically invest in private equity through limited partnerships in which the general partner develops an investment strategy and limited partners provide the large majority of the capital. After creating a new fund and raising capital from the limited partners, the general partner begins to invest in companies that will make up the fund portfolio. Limited partners have both limited control over the underlying investments and also limited liability for potential debts incurred by the general partners through the fund.